ZTS
$70.79
Zoetis Inc Class A
$.38
.54%
Earnings Details
3rd Quarter September 2017
Thursday, November 2, 2017 7:00:10 AM
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Summary

Zoetis Inc Class A Reports In-line

Zoetis Inc Class A (ZTS) reported 3rd Quarter September 2017 earnings of $0.65 per share on revenue of $1.3 billion. The consensus earnings estimate was $0.63 per share on revenue of $1.3 billion. The Earnings Whisper number was $0.65 per share. Revenue grew 8.5% on a year-over-year basis.

The company said it expects 2017 earnings of $2.34 to $2.39 per share on revenue of $5.225 billion to $5.275 billion. The company's previous guidance was earnings of $2.30 to $2.37 per share on revenue of $5.15 billion to $5.25 billion and the current consensus earnings estimate is $2.34 per share on revenue of $5.21 billion for the year ending December 31, 2017.

Zoetis Inc discovers, develops, manufactures & commercializes animal health medicines & vaccines for livestock & companion animals. Its products include anti-infectives, vaccines, parasiticides, medicated feed additives & other pharmaceutical products.

Results
Reported Earnings
$0.65
Earnings Whisper
$0.65
Consensus Estimate
$0.63
Reported Revenue
$1.35 Bil
Revenue Estimate
$1.33 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Zoetis Announces Third Quarter 2017 Results

Reports Adjusted Net Income of $322 Million, or Adjusted Diluted EPS of $0.65, for Third Quarter 2017

Delivers 8% Operational Growth in Revenue and 25% Operational Growth in Adjusted Net Income, Excluding Foreign Exchange, for Third Quarter 2017

Raises Full Year 2017 Revenue Guidance to $5.225 - $5.275 Billion and Diluted EPS to $2.16 - $2.23 on a Reported Basis, or $2.34 - $2.39 on an Adjusted Basis

Zoetis Inc. (ZTS) today reported its financial results for the third quarter of 2017 and raised its full year guidance for revenue and net income.

The company reported revenue of $1.3 billion for the third quarter of 2017, an increase of 9% compared with the third quarter of 2016. Net income for the third quarter of 2017 was $298 million, or $0.61 per diluted share, an increase of 25% and 27%, respectively, on a reported basis.

Adjusted net income(1) for the third quarter of 2017 was $322 million, or $0.65 per diluted share, an increase of 25%, on a reported basis. Adjusted net income for the third quarter of 2017 excludes the net impact of $24 million for purchase accounting adjustments, acquisition-related costs and certain significant items.

On an operational(2) basis, revenue for the third quarter of 2017 increased 8%, excluding the impact of foreign currency. Adjusted net income for the third quarter of 2017 increased 25% operationally, excluding the impact of foreign currency.

EXECUTIVE COMMENTARY

"In the third quarter, we delivered strong operational revenue and adjusted earnings growth of 8% and 25%, respectively," said Juan Ramon Alaix, Chief Executive Officer at Zoetis. "Our companion animal portfolio grew 19% operationally, led by our industry leading dermatology products and increased adoption of our oral parasiticide, Simparica. On the livestock side of our business, we grew 2% operationally, with growth in our fish and poultry products that support the world’s fastest growing sources of protein. This growth in livestock was offset primarily by lower sales in cattle and swine products in the U.S., due to lower disease incidence and shifts in treatment protocols related to the Veterinary Feed Directive implementation."

"As expected, in the third quarter, our focus on cost of goods and expenses enabled us to improve our margins and grow adjusted earnings significantly faster than sales," said Glenn David, Executive Vice President and Chief Financial Officer at Zoetis. "With one quarter left in 2017, we are raising our full year guidance for revenue and net income, and we expect to continue delivering steady, profitable growth based on the performance of our diverse portfolio and investments in innovation."

QUARTERLY HIGHLIGHTS

Zoetis organizes and manages its commercial operations across two regional segments: the United States (U.S.) and International. Within these segments, the company delivers a diverse portfolio of products for livestock and companion animals tailored to local trends and customer needs. In the third quarter of 2017:

Revenue in the U.S. segment was $680 million, an increase of 6% compared with the third quarter of 2016. Sales of companion animal products grew 21%, driven by increased sales in our dermatology portfolio, in addition to several other new products, primarily Simparica(R) (sarolaner), our oral parasiticide. Sales of livestock products declined 6% driven primarily by decreased sales of cattle products due to the impact of promotional activities in the prior year and continued lower disease risk and incidence in the feedlot sector. In addition, certain medicated feed additive products for cattle and swine were negatively impacted by livestock producers’ continued implementation of the Veterinary Feed Directive. The decline in cattle and swine products was partially offset by increased sales of poultry medicated feed additive products.

Revenue in the International segment was $654 million, an increase of 12% on a reported basis and 11% operationally compared with the third quarter of 2016. Sales of companion animal products grew 15% on both a reported and operational basis, resulting primarily from increased sales of Simparica and Apoquel(R) (oclacitinib tablet). Sales also benefited from growth in companion animal vaccines in China. Sales of livestock products grew 10% on a reported basis and 9% on an operational basis, driven by increased sales of fish products and balanced growth across other species. Fish product sales grew due to a new product in Norway, as well as in-line product growth across various markets, including Chile. Cattle product growth reflects favorable performance in Brazil, Argentina and Australia, and swine growth was driven by new products across Europe and Asia.

Zoetis continues to drive demand and strengthen its diverse portfolio through the introduction of new products, lifecycle innovations, business development initiatives, strong customer relationships and entry into new markets and technologies. In the third quarter of 2017, Zoetis received approvals for new indications and formulations and expanded major product lines into new geographies.

In August 2017, the European Commission granted Zoetis approval for Suvaxyn(R) PRRS MLV, a new addition to the Suvaxyn/Fostera(R) family of vaccines for swine. This modified live vaccine helps protect pigs against porcine respiratory and reproductive syndrome, one of the most common diseases affecting swine herds.

Also in August, Zoetis extended the breadth and reach of its poultry portfolio with the approval in Korea of Poulvac(R) Maternavac IBD-REO for the revaccination of chickens to help prevent locally prevalent strains of infectious bursal disease and avian reovirus. The company also brought its poultry diagnostics products ProFlok(R) and FluDetect(R) into major European markets in July. The point-of-care diagnostic kits deliver accurate, fast and clear results facilitating timely and informed diagnoses for a range of diseases.

Zoetis also gained new approvals for its oral flea and tick medication Simparica during September 2017 in Japan and Taiwan. Simparica delivers fast and persistent protection from fleas and ticks in dogs, with effectiveness that lasts for a full 35 days, without losing efficacy at the end of the month.

FINANCIAL GUIDANCE

Zoetis raised its guidance for the full year 2017, which includes:

-- Revenue between $5.225 billion to $5.275 billion

-- Reported diluted EPS between $2.16 to $2.23 per share

-- Adjusted diluted EPS between $2.34 to $2.39 per share

This guidance reflects foreign exchange rates as of late October. Additional guidance on other items such as expenses and tax rate is included in the financial tables and will be discussed on the company’s conference call this morning.

WEBCAST & CONFERENCE CALL DETAILS

Zoetis will host a webcast and conference call at 8:30 a.m. (ET) today, during which company executives will review third quarter 2017 results, discuss financial guidance and respond to questions from financial analysts. Investors and the public may access the live webcast by visiting the Zoetis website at http://investor.zoetis.com/events-presentations. A replay of the webcast will be archived and made available on November 2, 2017.

About Zoetis

Zoetis (ZTS) is the leading animal health company, dedicated to supporting its customers and their businesses. Building on more than 60 years of experience in animal health, Zoetis discovers, develops, manufactures and markets veterinary vaccines and medicines, complemented by diagnostic products, genetic tests, biodevices and a range of services. Zoetis serves veterinarians, livestock producers and people who raise and care for farm and companion animals with sales of its products in more than 100 countries. In 2016, the company generated annual revenue of $4.9 billion with approximately 9,000 employees. For more information, visit www.zoetis.com.

(1)Adjusted net income and its components and adjusted diluted earnings per share (non-GAAP financial measures) are defined as reported net income attributable to Zoetis and reported diluted earnings per share, excluding purchase accounting adjustments, acquisition-related costs and certain significant items.

(2)Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange.

DISCLOSURE NOTICES

Forward-Looking Statements: This press release contains forward-looking statements, which reflect the current views of Zoetis with respect to business plans or prospects, future operating or financial performance, future guidance, future operating models, expectations regarding products, future use of cash and dividend payments, tax rate and tax regimes, changes in the tax regimes and laws in other jurisdictions, and other future events. These statements are not guarantees of future performance or actions. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. Forward-looking statements speak only as of the date on which they are made. Zoetis expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, including in the sections thereof captioned "Forward-Looking Statements and Factors That May Affect Future Results" and "Item 1A. Risk Factors," in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K. These filings and subsequent filings are available online at www.sec.gov, www.zoetis.com, or on request from Zoetis.

Use of Non-GAAP Financial Measures: We use non-GAAP financial measures, such as adjusted net income, adjusted diluted earnings per share and operational results (which exclude the impact of foreign exchange), to assess and analyze our results and trends and to make financial and operational decisions. We believe these non-GAAP financial measures are also useful to investors because they provide greater transparency regarding our operating performance. The non-GAAP financial measures included in this press release should not be considered alternatives to measurements required by GAAP, such as net income, operating income, and earnings per share, and should not be considered measures of liquidity. These non-GAAP financial measures are unlikely to be comparable with non-GAAP information provided by other companies. Reconciliation of non-GAAP financial measures and GAAP financial measures are included in the tables accompanying this press release and are posted on our website at www.zoetis.com.

Internet Posting of Information: We routinely post information that may be important to investors in the ’Investors’ section of our website at www.zoetis.com, on our Facebook page at http://www.facebook.com/zoetis and on Twitter @zoetis. We encourage investors and potential investors to consult our website regularly and to follow us on Facebook and Twitter for important information about us.

ZOETIS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME(a)
(UNAUDITED)
(millions of dollars, except per share data)
Nine Months
2016
% Change
2017
2016
% Change
Revenue
$ 1,347
$ 1,241
9
$ 3,847
$ 3,611
7
Costs and expenses:
Cost of sales(b)
435
410
6
1,318
1,198
10
Selling, general and administrative expenses(b)
328
345
(5)
973
1,003
(3)
Research and development expenses(b)
96
90
7
272
268
1
Amortization of intangible assets(c)
23
21
10
68
64
6
Restructuring charges/(reversals) and certain acquisition-related
8
4
100
7
(15 )
*
costs
Interest expense
43
41
5
125
125
--
Other (income)/deductions-net
1
(3 )
*
(11 )
(29 )
(62)
Income before provision for taxes on income
413
333
24
1,095
997
10
Provision for taxes on income
117
96
22
313
332
(6)
Net income before allocation to noncontrolling interests
296
237
25
782
665
18
Less: Net loss attributable to noncontrolling interests
(2 )
(2 )
--
(1 )
(2 )
(50)
Net income attributable to Zoetis
$
298
$
239
25
$
783
$
667
17
Earnings per share--basic
$
0.61
$
0.48
27
$
1.60
$
1.34
19
Earnings per share--diluted
$
0.61
$
0.48
27
$
1.59
$
1.34
19
Weighted-average shares used to calculate earnings per share
Basic
489.1
495.2
490.8
496.3
Diluted
492.4
497.9
493.9
498.8
* Calculation not meaningful.
(a)
The condensed consolidated statements of income present the three
and nine months ended October 1, 2017, and October 2, 2016.
Subsidiaries operating outside the United States are included for
the three and nine months ended August 27, 2017 and August 28, 2016.
(b)
Exclusive of amortization of intangible assets, except as discussed
in footnote (c) below.
(c)
Amortization expense related to finite-lived acquired intangible
assets that contribute to our ability to sell, manufacture,
research, market and distribute products, compounds and
intellectual property is included in Amortization of intangible
assets as these intangible assets benefit multiple business
functions. Amortization expense related to finite-lived acquired
intangible assets that are associated with a single function is
included in Cost of sales, Selling, general and administrative
expenses or Research and development expenses, as appropriate.
Certain amounts and percentages may reflect rounding adjustments.
ZOETIS INC.
RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars, except per share data)
Quarter ended October 1, 2017
GAAP
Purchase
Acquisition-
Certain
Non-GAAP
Reported(a)
Accounting
Related
Significant
Adjusted(b)
Adjustments
Costs(1)
Items(2)
Cost of sales(c)
$ 435
$
(2 )
$ --
$
(1 )
$
432
Gross profit
912
2
--
1
915
Selling, general and administrative expenses(c)
328
(1 )
--
--
327
Research and development expenses(c)
96
(1 )
--
--
95
Amortization of intangible assets(d)
23
(19 )
--
--
4
Restructuring charges/(reversals) and certain acquisition-related
8
--
(6 )
(2 )
--
costs
Other (income)/deductions-net
1
--
--
(4 )
(3 )
Income before provision for taxes on income
413
23
6
7
449
Provision for taxes on income
117
7
2
3
129
Net income attributable to Zoetis
298
16
4
4
322
Earnings per common share attributable to Zoetis-diluted
0.61
0.02
0.01
0.01
0.65
Quarter ended October 2, 2016
GAAP
Purchase
Acquisition-
Certain
Non-GAAP
Reported(a)
Accounting
Related
Significant
Adjusted(b)
Adjustments
Costs(1)
Items(2)
Cost of sales(c)
$ 410
$
(7 )
$ --
$ --
$
403
Gross profit
831
7
--
--
838
Selling, general and administrative expenses(c)
345
(1 )
--
(11 )
333
Amortization of intangible assets(d)
21
(17 )
--
--
4
Restructuring charges/(reversals) and certain acquisition-related
4
--
--
(4 )
--
costs
Other (income)/deductions-net
(3 )
--
--
(1 )
(4 )
Income before provision for taxes on income
333
25
--
16
374
Provision for taxes on income
96
7
--
15
118
Net income attributable to Zoetis
239
18
--
1
258
Earnings per common share attributable to Zoetis-diluted
0.48
0.04
--
--
0.52
ZOETIS INC.
RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars, except per share data)
Nine months ended October 1, 2017
GAAP
Purchase
Acquisition-
Certain
Non-GAAP
Reported(a)
Accounting
Related
Significant
Adjusted(b)
Adjustments
Costs(1)
Items(2)
Cost of sales(c)
$ 1,318
$
(5 )
$ --
$
(6 )
$
1,307
Gross profit
2,529
5
--
6
2,540
Selling, general and administrative expenses(c)
973
(4 )
--
(3 )
966
Research and development expenses(c)
272
(2 )
--
--
270
Amortization of intangible assets(d)
68
(55 )
--
--
13
Restructuring charges/(reversals) and certain acquisition-related
7
--
(8 )
1
--
costs
Other (income)/deductions-net
(11 )
--
--
(2 )
(13 )
Income before provision for taxes on income
1,095
66
8
10
1,179
Provision for taxes on income
313
16
3
4
336
Net income attributable to Zoetis
783
50
5
6
844
Earnings per common share attributable to Zoetis-diluted
1.59
0.10
0.01
0.01
1.71
Nine months ended October 2, 2016
GAAP
Purchase
Acquisition-
Certain
Non-GAAP
Reported(a)
Accounting
Related
Significant
Adjusted(b)
Adjustments
Costs(1)
Items(2)
Cost of sales(c)
$ 1,198
$
(22 )
$ --
$
(7 )
$
1,169
Gross profit
2,413
22
--
7
2,442
Selling, general and administrative expenses(c)
1,003
(4 )
--
(35 )
964
Research and development expenses(c)
268
(1 )
--
--
267
Amortization of intangible assets(d)
64
(52 )
--
--
12
Restructuring charges/(reversals) and certain acquisition-related
(15 )
--
(2 )
17
--
costs
Other (income)/deductions-net
(29 )
--
(1 )
26
(4 )
Income before provision for taxes on income
997
79
3
(1 )
1,078
Provision for taxes on income
332
34
(1 )
(28 )
337
Net income attributable to Zoetis
667
45
4
27
743
Earnings per common share attributable to Zoetis-diluted
1.34
0.09
0.01
0.05
1.49
(a)
The condensed consolidated statements of income present the three
and nine months ended October 1, 2017, and October 2, 2016.
Subsidiaries operating outside the United States are included for
the three and nine months ended August 27, 2017 and August 28, 2016.
(b)
Non-GAAP adjusted net income and its components and non-GAAP
adjusted diluted EPS are not, and should not be viewed as,
substitutes for U.S. GAAP net income and its components and diluted
EPS. Despite the importance of these measures to management in goal
setting and performance measurement, non-GAAP adjusted net income
and its components and non-GAAP adjusted diluted EPS are non-GAAP
financial measures that have no standardized meaning prescribed by
U.S. GAAP and, therefore, have limits in their usefulness to
investors. Because of the non-standardized definitions, non-GAAP
adjusted net income and its components and non-GAAP adjusted diluted
EPS (unlike U.S. GAAP net income and its components and diluted EPS)
may not be comparable to the calculation of similar measures of
other companies. Non-GAAP adjusted net income and its components,
and non-GAAP adjusted diluted EPS are presented solely to permit
investors to more fully understand how management assesses
performance.
(c)
Exclusive of amortization of intangible assets, except as discussed
in footnote (d) below.
(d)
Amortization expense related to finite-lived acquired intangible
assets that contribute to our ability to sell, manufacture,
research, market and distribute products, compounds and
intellectual property is included in Amortization of intangible
assets as these intangible assets benefit multiple business
functions. Amortization expense related to finite-lived acquired
intangible assets that are associated with a single function is
included in Cost of sales, Selling, general and administrative
expenses or Research and development expenses, as appropriate.
See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted
Information for notes (1) and (2).
Certain amounts may reflect rounding adjustments.
ZOETIS INC.
NOTES TO RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED
INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars)
(1) Acquisition-related costs include the following:
Third Quarter
Nine Months
2017
2016
2017
2016
Integration costs(a)
$
2
$ --
$
4
$
2
Restructuring charges(b)
4
--
4
--
Other(c)
--
--
--
1
Total acquisition-related costs--pre-tax
6
--
8
3
Income taxes(d)
2
--
3
(1 )
Total acquisition-related costs--net of tax
$
4
$ --
$
5
$
4
(a)
Integration costs represent external, incremental costs directly
related to integrating acquired businesses and primarily include
expenditures for consulting and the integration of systems and
processes. Included in Restructuring charges/(reversals) and
certain acquisition-related costs.
(b)
Represents employee termination costs related to the acquisition
of an Irish biologic therapeutics company in the third quarter of
2017, included in Restructuring charges/(reversals) and certain
acquisition-related costs.
(c)
Included in Other (income)/deductions--net.
(d)
Included in Provision for taxes on income. Income taxes
include the tax effect of the associated pre-tax amounts,
calculated by determining the jurisdictional location of the
pre-tax amounts and applying that jurisdiction’s applicable tax
rate. The nine months ended October 2, 2016, also includes a tax
charge related to the acquisition of certain assets of Abbott
Animal Health.
Certain amounts may reflect rounding adjustments.

(2) Certain significant items include the following:

Third Quarter
Nine Months
2017
2016
2017
2016
Operational efficiency initiative(a)
$
(1 )
$
9
$
4
$ (36 )
Supply network strategy(b)
8
2
7
13
Other restructuring charges and cost-reduction/productivity
--
--
--
(1 )
initiatives(c)
Certain asset impairment charges(d)
--
1
--
1
Stand-up costs(e)
--
1
--
18
Other(f)
--
3
(1 )
4
Total certain significant items--pre-tax
7
16
10
(1 )
Income taxes(g)
3
15
4
(28 )
Total certain significant items--net of tax
$
4
$
1
$
6
$
27
(a)
For the three months ended October 1, 2017, represents
employee termination costs of $1 million, and a reversal of $1
million related to exit costs, included in Restructuring
charges/(reversals) and certain acquisition-related costs, and
an adjustment to the net gain related to sales of certain
manufacturing sites and products of $1 million, included in Other
(income)/deductions--net. For the nine months ended October 1,
2017, represents consulting fees of $1 million, included in Selling,
general and administrative expenses, employee termination
costs of $2 million, included in Restructuring
charges/(reversals) and certain acquisition-related costs, and
a net loss related to sales of certain manufacturing sites and
products of $1 million, included in Other
(income)/deductions--net.
For the three months ended October 2, 2016, represents inventory
write-offs of $1 million, included in Cost of sales,
consulting fees of $4 million, included in Selling, general and
administrative expenses, and employee termination costs of $3
million and exit costs of $1 million, included in Restructuring
charges/(reversals) and certain acquisition-related costs. For
the nine months ended October 2, 2016, represents inventory
write-offs of $1 million, included in Cost of sales,
accelerated depreciation of $1 million and consulting fees of $11
million, included in Selling, general and administrative
expenses, a reversal of previously accrued employee
termination costs of $26 million and an increase in exit costs of
$4 million, included in Restructuring charges/(reversals) and
certain acquisition-related costs, and a $27 million net gain
related to sales of certain manufacturing sites and products,
included in Other (income)/deductions--net.
(b)
For the three months ended October 1, 2017, represents consulting
fees of $2 million, and an adjustment of $1 million related to the
requirement to cease depreciation of assets, located at our
manufacturing site in Guarulhos Brazil, that are currently
classified as held for sale, included in Cost of sales,
employee termination costs of $2 million, included in Restructuring
charges/(reversals) and certain acquisition-related costs, and
a net loss related to sales of certain manufacturing sites and
products, including the anticipated disposal of our manufacturing
site in Guarulhos, Brazil, of $5 million, included in Other
(income)/deductions--net. For the nine months ended October 1,
2017, represents accelerated depreciation of $2 million,
consulting fees of $4 million, and an adjustment of $1 million
related to the requirement to cease depreciation of assets,
located at our manufacturing site in Guarulhos Brazil, that are
currently classified as held for sale, included in Cost of sales,
a reversal of previously accrued employee terminations costs of $3
million, included in Restructuring charges/(reversals) and
certain acquisition-related costs, and a net loss related to
sales of certain manufacturing sites and products, including the
anticipated disposal of our manufacturing site in Guarulhos,
Brazil, of $5 million, included in Other (income)/deductions--net.
For the three months ended October 2, 2016, represents accelerated
depreciation of $2 million, included in Cost of sales. For
the nine months ended October 2, 2016, represents accelerated
depreciation of $4 million and consulting fees of $3 million,
included in Cost of sales, and employee termination
costs of $6 million, included in Restructuring
charges/(reversals) and certain acquisition-related costs.
(c)
Included in Restructuring charges/(reversals) and certain
acquisition-related costs.
(d)
For the three and nine months ended October 2, 2016, represents an
impairment of finite-lived trademarks related to a canine pain
management product, included in Other (income)/deductions--net.
(e)
Represents certain nonrecurring costs related to becoming an
independent public company, such as the creation of standalone
systems and infrastructure, site separation, new branding (including
changes to the manufacturing process for required new packaging),
and certain legal registration and patent assignment costs. For the
three and nine months ended October 2, 2016, included in Cost of
sales ($3 million benefit and $1 million benefit, respectively)
and Selling, general and administrative expenses ($4 million
and $19 million, respectively).
(f)
For the nine months ended October 1, 2017, primarily represents
costs associated with changes to our operating model of $1 million,
included in Cost of sales, and $2 million, included in Selling,
general and administrative expenses, and income of $4 million
related to an insurance recovery from commercial settlements in
Mexico recorded in 2014 and 2016, included in Other
(income)/deductions--net.
For the three and nine months ended October 2, 2016, represents
costs associated with changes to our operating model in Selling,
general and administrative expenses.
(g)
Included in Provision for taxes on income. Income taxes
include the tax effect of the associated pre-tax amounts, calculated
by determining the jurisdictional location of the pre-tax amounts
and applying that jurisdiction’s applicable tax rate. For the nine
months ended October 1, 2017, also includes a net tax charge of
approximately $1 million, related to the revaluation of the
company’s deferred tax assets and liabilities, using the rates
expected to be in place at the time of the reversal.
For the nine months ended October 2, 2016, also includes (i) a net
tax benefit of approximately $7 million related to a revaluation of
the company’s deferred tax assets and liabilities using the tax
rates expected to be in place going forward as a result of the
implementation of certain operational changes and (ii) a net tax
charge of approximately $38 million related to the impact of the
European Commission’s negative decision on the excess profits
rulings in Belgium. This net charge represents the recovery of prior
tax benefits for the periods 2013 through 2015 offset by the
revaluation of the company’s deferred tax assets and liabilities,
using the rates expected to be in place at the time of the reversal,
and does not include any benefits associated with a successful
appeal of the decision.
Certain amounts may reflect rounding adjustments.
ZOETIS INC.
ADJUSTED SELECTED COSTS, EXPENSES AND INCOME (a)
(UNAUDITED)
(millions of dollars)
Third Quarter
% Change
2017
2016
Total
Foreign
Operational(b)
Exchange
Adjusted cost of sales
$ 432
$ 403
7
%
--%
7%
as a percent of revenue
32.1
%
32.5
%
NA
NA
NA
Adjusted SG&A expenses
$ 327
$ 333
(2 )%
--%
(2)%
Adjusted R&D expenses
95
90
6
%
--%
6%
Adjusted net income attributable to Zoetis
322
258
25
%
--%
25%
Nine Months
% Change
2017
2016
Total
Foreign
Operational(b)
Exchange
Adjusted cost of sales
$ 1,307
$ 1,169
12
%
2
%
10%
as a percent of revenue
34.0
%
32.4
%
NA
NA
NA
Adjusted SG&A expenses
$
966
$
964
--
%
--
%
--%
Adjusted R&D expenses
270
267
1
%
--
%
1%
Adjusted net income attributable to Zoetis
844
743
14
%
(2
)%
16%
(a)
Adjusted cost of sales, adjusted selling, general, and
administrative (SG&A) expenses, adjusted research and development
(R&D) expenses, and adjusted net income attributable to Zoetis
(non-GAAP financial measures) are defined as the corresponding
reported U.S. GAAP income statement line items excluding purchase
accounting adjustments, acquisition-related costs, and certain
significant items. Reconciliations of certain reported to adjusted
information for the three and nine months ended October 1, 2017, and
October 2, 2016, are provided in the materials accompanying this
report. These adjusted income statement line item measures are not,
and should not be viewed as, substitutes for the corresponding U.S.
GAAP line items. For the corresponding GAAP line items, see
Condensed Consolidated Statements of Operations and Reconciliation
of GAAP Reported to Non-GAAP Adjusted Information.
(b)
Operational growth (a non-GAAP financial measure) is defined as
growth excluding the impact of foreign exchange.
ZOETIS INC.
2017 GUIDANCE
Selected Line Items
Full Year 2017
(millions of dollars, except per share amounts)
Revenue
$5,225 to $5,275
Operational growth(a)
7% to 8%
Adjusted cost of sales as a percentage of revenue(b)
Approximately 33%
Adjusted SG&A expenses(b)
$1,310 to $1,335
Adjusted R&D expenses(b)
$375 to $385
Adjusted interest expense and other (income)/deductions(b)
Approximately $160
Adjusted EBIT margin(b)
34% to 34.5%
Effective tax rate on adjusted income(b)
Approximately 29%
Adjusted diluted EPS(b)
$2.34 to $2.39
Adjusted net income(b)
$1,155 to $1,180
Operational growth(a)(c)
18% to 21%
Certain significant items(d) and acquisition-related costs
$20 to $40

The guidance reflects foreign exchange rates as of late October 2017.

Reconciliations of 2017 reported guidance to 2017 adjusted guidance follows:

(millions of dollars, except per share amounts)
Reported
Certain significant
Purchase
Adjusted(b)
items(d) and
accounting
acquisition-related
costs
Cost of sales as a percentage of revenue
33.5%
(0.5%)
33%
SG&A expenses
$1,320 to $1,345
($5)
($5)
$1,310 to $1,335
R&D expenses
$375 to $385
$375 to $385
Interest expense and other (income)/deductions
$165
($5)
$160
EBIT margin
32% to 32.5%
0.5% to 1%
1.5%
34% to 34.5%
Effective tax rate
29%
29%
Diluted EPS
$2.16 to $2.23
$0.03 to $0.05
$0.13
$2.34 to $2.39
Net income attributable to Zoetis
$1,065 to $1,100
$15 to $25
$65
$1,155 to $1,180
(a)
Operational growth (a non-GAAP financial measure) excludes the
impact of foreign exchange.
(b)
Adjusted net income and its components and adjusted diluted EPS are
defined as reported U.S. GAAP net income and its components and
reported diluted EPS excluding purchase accounting adjustments,
acquisition-related costs and certain significant items. Adjusted
cost of sales, adjusted SG&A expenses, adjusted R&D expenses,
adjusted interest expense, and adjusted other (income)/deductions
are income statement line items prepared on the same basis, and,
therefore, components of the overall adjusted income measure.
Adjusted earnings before interest and taxes (EBIT) is defined as
reported EBIT excluding purchase accounting adjustments,
acquisition-related costs and certain significant items. Despite the
importance of these measures to management in goal setting and
performance measurement, adjusted net income and its components and
adjusted diluted earnings per share (EPS) are non-GAAP financial
measures that have no standardized meaning prescribed by U.S. GAAP
and, therefore, have limits in their usefulness to investors.
Because of the non-standardized definitions, adjusted net income and
its components and adjusted diluted EPS (unlike U.S. GAAP net income
and its components and diluted EPS) may not be comparable to the
calculation of similar measures of other companies. Adjusted net
income and its components and adjusted diluted EPS are presented
solely to permit investors to more fully understand how management
assesses performance. Adjusted net income and its components and
adjusted diluted EPS are not, and should not be viewed as,
substitutes for U.S. GAAP net income and its components and diluted
EPS.
(c)
We do not provide a reconciliation of forward-looking non-GAAP
adjusted net income operational growth to the most directly
comparable GAAP reported financial measure because we are unable to
calculate with reasonable certainty the foreign exchange impact of
unusual gains and losses, acquisition-related expenses, potential
future asset impairments and other certain significant items,
without unreasonable effort. The foreign exchange impacts of these
items are uncertain, depend on various factors, and could have a
material impact on GAAP reported results for the guidance period.
(d)
Primarily includes certain nonrecurring costs related to
restructuring, net gains/losses on sales of assets, and other
charges for the operational efficiency initiative and supply network
strategy.
ZOETIS INC.
CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES
(UNAUDITED)
(millions of dollars)
Third Quarter
% Change
2017
2016
Total
Foreign
Operational(b)
Exchange
Revenue:
Livestock
$
754
$
735
3
%
1%
2%
Companion Animal
580
490
18
%
(1)%
19%
Contract Manufacturing
13
16
(19 )%
3%
(22)%
Total Revenue
$
1,347
$ 1,241
9
%
1%
8%
U.S.
Livestock
$
319
$
341
(6 )%
--%
(6)%
Companion Animal
361
299
21
%
--%
21%
Total U.S. Revenue
$
680
$
640
6
%
--%
6%
International
Livestock
$
435
$
394
10
%
1%
9%
Companion Animal
219
191
15
%
--%
15%
Total International Revenue
$
654
$
585
12
%
1%
11%
Livestock:
Cattle
$
424
$
432
(2 )%
--%
(2)%
Swine
147
145
1
%
--%
1%
Poultry
119
111
7
%
--%
7%
Fish
39
25
56
%
4%
52%
Other
25
22
14
%
4%
10%
Total Livestock Revenue
$
754
$
735
3
%
1%
2%
Companion Animal:
Horses
$
34
$
33
3
%
(3)%
6%
Dogs and Cats
546
457
19
%
(1)%
20%
Total Companion Animal Revenue
$
580
$
490
18
%
(1)%
19%
(a)
For a description of each segment, see Note 18A to Zoetis’
consolidated financial statements included in Zoetis’ Form 10-K for
the year ended December 31, 2016.
(b)
Operational revenue growth (a non-GAAP financial measure) is defined
as revenue growth excluding the impact of foreign exchange.
Certain amounts and percentages may reflect rounding adjustments.
ZOETIS INC.
CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES
(UNAUDITED)
(millions of dollars)
Nine Months
% Change
2017
2016
Total
Foreign
Operational(b)
Exchange
Revenue:
Livestock
$
2,146
$ 2,091
3
%
--%
3%
Companion Animal
1,665
1,479
13
%
--%
13%
Contract Manufacturing
36
41
(12 )%
--%
(12)%
Total Revenue
$
3,847
$ 3,611
7
%
--%
7%
U.S.
Livestock
$
870
$
891
(2 )%
--%
(2)%
Companion Animal
1,038
925
12
%
--%
12%
Total U.S. Revenue
$
1,908
$ 1,816
5
%
--%
5%
International
Livestock
$
1,276
$ 1,200
6
%
--%
6%
Companion Animal
627
554
13
%
(2)%
15%
Total International Revenue
$
1,903
$ 1,754
8
%
(1)%
9%
Livestock:
Cattle
$
1,192
$ 1,175
1
%
--%
1%
Swine
455
441
3
%
--%
3%
Poultry
357
351
2
%
--%
2%
Fish
79
64
23
%
--%
23%
Other
63
60
5
%
1%
4%
Total Livestock Revenue
$
2,146
$ 2,091
3
%
--%
3%
Companion Animal:
Horses
$
104
$
108
(4 )%
(2)%
(2)%
Dogs and Cats
1,561
1,371
14
%
--%
14%
Total Companion Animal Revenue
$
1,665
$ 1,479
13
%
--%
13%
(a)
For a description of each segment, see Note 18A to Zoetis’
consolidated financial statements included in Zoetis’ Form 10-K for
the year ended December 31, 2016.
(b)
Operational revenue growth (a non-GAAP financial measure) is defined
as revenue growth excluding the impact of foreign exchange.
Certain amounts and percentages may reflect rounding adjustments.
ZOETIS INC.
CONSOLIDATED REVENUE BY KEY INTERNATIONAL MARKETS
(UNAUDITED)
(millions of dollars)
Third Quarter
% Change
2017
2016
Total
Foreign
Operational(a)
Exchange
Total International
$ 654
$ 585
12
%
1%
11%
Australia
51
42
21
%
2%
19%
Brazil
66
56
18
%
4%
14%
Canada
40
39
3
%
1%
2%
China
40
33
21
%
(1)%
22%
France
30
28
7
%
5%
2%
Germany
35
29
21
%
5%
16%
Italy
22
21
5
%
1%
4%
Japan
31
34
(9 )%
(6)%
(3)%
Mexico
21
17
24
%
6%
18%
Spain
24
20
20
%
5%
15%
United Kingdom
36
35
3
%
(4)%
7%
Other Developed
96
80
20
%
2%
18%
Other Emerging
162
151
7
%
(2)%
9%
Nine Months
% Change
2017
2016
Total
Foreign
Operational(a)
Exchange
Total International
$ 1,903
$ 1,754
8
%
(1)%
9%
Australia
134
119
13
%
3%
10%
Brazil
205
162
27
%
15%
12%
Canada
123
120
3
%
--%
3%
China
137
113
21
%
(6)%
27%
France
85
89
(4 )%
--%
(4)%
Germany
96
90
7
%
(1)%
8%
Italy
65
63
3
%
(2)%
5%
Japan
101
96
5
%
(2)%
7%
Mexico
60
56
7
%
(7)%
14%
Spain
67
62
8
%
(1)%
9%
United Kingdom
105
112
(6 )%
(11)%
5%
Other Developed
240
223
8
%
1%
7%
Other Emerging
485
449
8
%
(2)%
10%
(a)
Operational revenue growth (a non-GAAP financial measure) is defined
as revenue growth excluding the impact of foreign exchange.
Certain amounts and percentages may reflect rounding adjustments.
ZOETIS INC.
SEGMENT(a) EARNINGS
(UNAUDITED)
(millions of dollars)
Third Quarter
% Change
2017
2016
Total
Foreign
Operational(b)
Exchange
U.S.:
Revenue
$
680
$
640
6
%
--%
6%
Cost of Sales
141
137
3
%
--%
3%
Gross Profit
539
503
7
%
--%
7%
Gross Margin
79.3
%
78.6
%
Operating Expenses
103
101
2
%
--%
2%
Other (income)/deductions
--
--
--%
--%
--%
U.S. Earnings
$
436
$
402
8
%
--%
8%
International:
Revenue
$
654
$
585
12
%
1%
11%
Cost of Sales
213
201
6
%
--%
6%
Gross Profit
441
384
15
%
1%
14%
Gross Margin
67.4
%
65.6
%
Operating Expenses
132
128
3
%
1%
2%
Other (income)/deductions
--
--
--%
--%
--%
International Earnings
$
309
$
256
21
%
2%
19%
Total Reportable Segments
$
745
$
658
13
%
--%
13%
Other business activities(c)
(77 )
(71 )
8
%
Reconciling Items:
Corporate(d)
(143 )
(159 )
(10
)%
Purchase accounting adjustments(e)
(23 )
(25 )
(8
)%
Acquisition-related costs(f)
(6 )
--
*
Certain significant items(g)
(7 )
(16 )
(56
)%
Other unallocated(h)
(76 )
(54 )
41
%
Total Earnings(i)
$
413
$
333
24
%
* Calculation not meaningful.
(a)
For a description of each segment, see Note 18A to Zoetis’
consolidated financial statements included in Zoetis’ Form 10-K for
the year ended December 31, 2016.
(b)
Operational growth (a non-GAAP financial measure) is defined as
growth excluding the impact of foreign exchange.
(c)
Other business activities reflect the research and development costs
managed by our Research and Development organization as well as our
contract manufacturing business.
(d)
Corporate includes, among other things, administration expenses,
interest expense, certain compensation costs, certain procurement
costs, and other costs not charged to our operating segments.
(e)
Purchase accounting adjustments include certain charges related to
the amortization of fair value adjustments to inventory, intangible
assets and property, plant and equipment not charged to our
operating segments.
(f)
Acquisition-related costs can include costs associated with
acquiring and integrating newly acquired businesses, such as
transaction costs and integration costs.
(g)
Certain significant items includes substantive, unusual items that,
either as a result of their nature or size, would not be expected to
occur as part of our normal business on a regular basis. Such items
primarily include certain costs related to becoming an independent
public company, restructuring charges and implementation costs
associated with our cost-reduction/productivity initiatives that are
not associated with an acquisition, costs associated with the
operational efficiency initiative and supply network strategy,
certain legal and commercial settlements, and the impact of
divestiture-related gains and losses.
(h)
Includes overhead expenses associated with our manufacturing and
supply operations not directly attributable to an operating segment,
as well as certain procurement costs.
(i)
Defined as income before provision for taxes on income.
Certain amounts and percentages may reflect rounding adjustments.
ZOETIS INC.
SEGMENT(a) EARNINGS
(UNAUDITED)
(millions of dollars)
Nine Months
% Change
2017
2016
Total
Foreign
Operational(b)
Exchange
U.S.:
Revenue
$
1,908
$
1,816
5
%
--%
5%
Cost of Sales
412
402
2
%
--%
2%
Gross Profit
1,496
1,414
6
%
--%
6%
Gross Margin
78.4
%
77.9
%
Operating Expenses
312
293
6
%
--%
6%
Other (income)/deductions
--
--
--%
--%
--%
U.S. Earnings
$
1,184
$
1,121
6
%
--%
6%
International:
Revenue
$
1,903
$
1,754
8
%
(1)%
9%
Cost of Sales
645
598
8
%
--%
8%
Gross Profit
1,258
1,156
9
%
(1)%
10%
Gross Margin
66.1
%
65.9
%
Operating Expenses
372
361
3
%
--%
3%
Other (income)/deductions
(1 )
3
*
*
*
International Earnings
$
887
$
792
12
%
(1)%
13%
Total Reportable Segments
$
2,071
$
1,913
8
%
(1)%
9%
Other business activities(c)
(224 )
(219 )
2
%
Reconciling Items:
Corporate(d)
(437 )
(499 )
(12
)%
Purchase accounting adjustments(e)
(66 )
(79 )
(16
)%
Acquisition-related costs(f)
(8 )
(3 )
*
Certain significant items(g)
(10 )
1
*
Other unallocated(h)
(231 )
(117 )
97
%
Total Earnings(i)
$
1,095
$
997
10
%
* Calculation not meaningful.
(a)
For a description of each segment, see Note 18A to Zoetis’
consolidated financial statements included in Zoetis’ Form 10-K for
the year ended December 31, 2016.
(b)
Operational growth (a non-GAAP financial measure) is defined as
growth excluding the impact of foreign exchange.
(c)
Other business activities reflect the research and development costs
managed by our Research and Development organization as well as our
contract manufacturing business.
(d)
Corporate includes, among other things, administration expenses,
interest expense, certain compensation costs, certain procurement
costs, and other costs not charged to our operating segments.
(e)
Purchase accounting adjustments include certain charges related to
the amortization of fair value adjustments to inventory, intangible
assets and property, plant and equipment not charged to our
operating segments.
(f)
Acquisition-related costs can include costs associated with
acquiring and integrating newly acquired businesses, such as
transaction costs and integration costs.
(g)
Certain significant items includes substantive, unusual items that,
either as a result of their nature or size, would not be expected to
occur as part of our normal business on a regular basis. Such items
primarily include certain costs related to becoming an independent
public company, restructuring charges and implementation costs
associated with our cost-reduction/productivity initiatives that are
not associated with an acquisition, costs associated with the
operational efficiency initiative and supply network strategy,
certain legal and commercial settlements, and the impact of
divestiture-related gains and losses.
(h)
Includes overhead expenses associated with our manufacturing and
supply operations not directly attributable to an operating segment,
as well as certain procurement costs.
(i)
Defined as income before provision for taxes on income.
Certain amounts and percentages may reflect rounding adjustments.

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Zoetis Inc.
Media
Bill Price, 1-973-443-2742 (o)
william.price@zoetis.com
or
Elinore White, 1-973-443-2835 (o)
elinore.y.white@zoetis.com
or
Investors
Steve Frank, 1-973-822-7141 (o)
steve.frank@zoetis.com